Fin 461 Exam 1
equates marginal tax savings from additional debt to the marginal increased bankruptcy costs of that debt.
According to the static theory of capital structure, the optimal capital structure for a company:
decrease in total assets
All else constant, a(n) ______ will increase the internal rate of growth.
The firm cannot exceed its internal rate of growth.
Carew-Gonzales Corporation's net working capital and all of its expenses vary directly with sales. The firm is currently operating at 92 percent of capacity. The firm wants no additional external financing of any kind. The firm's income tax rate is 21 percent and its dividend payout ratio is fixed at 22 percent. Which statement related to next year's pro forma statements must be correct?
.97 878,000*100/93=944,086 913,000/944,086=.967
Cheng & Cronin Equipment has $878,000 in sales and $913,000 of total assets. The firm is operating at 93 percent of capacity. What is the capital intensity ratio at full capacity?
9.84% =.5*1.60*1.4=.112 [.112*(1-.2)]/[1-[.112(1-.2)]=.0984 or 9.84%
Dance World has a net profit margin of 5 percent and a dividend payout ratio of 20 percent. The total asset turnover is 1.6 and the debt-equity ratio is .4. What is the sustainable growth rate?
2.30% [.09*(1-.75)]/[1-.09*(1-.75)]=.0230 or 2.3%
Digital Movement has a return on assets of 9 percent and a dividend payout ratio of 75 percent. What is the internal growth rate?
risks associated with cash flows.
Financial plans generally tend to ignore:
often contain alternative options based on economic developments.
Financial plans:
dependent upon a company's capital structure.
Financial risk is:
value of the levered company will exceed the value of the unlevered company.
If a company has the optimal amount of debt, then the:
company is earning just enough to pay for the cost of the debt.
Ignoring taxes, at the break-even point between a levered and an unlevered capital structure, the:
indirect bankruptcy
In an effort to avoid bankruptcy, a firm may incur certain costs, called ________ costs.
vary significantly across industries
In general, the capital structures of U.S. firms:
a company's debt-equity ratio is completely irrelevant.
M&M Proposition I with no tax supports the argument that:
the value of a taxable company increases as the level of debt increases.
M&M Proposition I with taxes is based on the concept that:
are projections, not guarantees
Pro forma statements:
95.36% 48,900/.87=56,206.90 53,600/56,206/90 =.9536 or 93.56%
Rocky Top has a capital intensity ratio of .87 at full capacity. Currently, total assets are $48,900 and current sales are $53,600. At what level of capacity is the firm currently operating?
aggregation
Selio Home Services combines the investment proposals from each operational unit into one single project for planning purposes. This process is referred to as:
$347,558.14 298,900*100/86
Shah Fabrication currently has $298,900 in sales and is operating at 86 percent of the firm's capacity. The dividend payout ratio is 40 percent and cost of goods sold is $211,300. If the firm were to operate at full capacity, what would sales be?
which parties receive payment first in a bankruptcy proceeding.
The absolute priority rule determines:
homemade leverage
The existence of ________ makes the capital structure of a company irrelevant.
direct bankruptcy
The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs.
percentage of sales
The financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values is referred to as the ______ method.
I, II, III, and IV
The financial planning process includes: I. determining asset requirements. II. developing contingency plans. III. establishing priorities. IV. analyzing funding options.
consider the development of future technologies
The financial planning process is least apt to:
market value
The financial planning process tends to place the least emphasis on a firm's:
all-equity company; weighted average cost of capital.
The symbol "Ru" refers to the cost of capital for a(n) ______ while "Ra" represents the:
18 months
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, how long after a company firm files for bankruptcy protection do creditors have to wait before submitting their own reorganization plan to the court?
reorganization
Wagner Resources was unable to meet its financial obligations. Its creditors forced it into using legal proceedings to restructure itself so that it could continue as a viable business. The process this company underwent is known as a:
dividend policy
When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance?
varies proportionally with sales
When constructing a pro forma statement, net working capital generally:
projected sales
When preparing pro forma statements, which one of the following is an analyst most likely to estimate first?
I, II, III, and IV
Which of the following questions are appropriate to address during the financial planning process? I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced?
quick ratio
Which one of the following has the least effect on a firm's sustainable rate of growth?
The optimal capital structure maximizes shareholder value.
Which one of the following statements is accurate?
Under a Chapter 7 bankruptcy, a trustee will assume control of the company's assets until those assets can be liquidated.
Which one of the following statements related to Chapter 7 bankruptcy is correct?
payment of employee's wages
Which one of the following will generally have the highest priority when assets are distributed in a bankruptcy proceeding?
Companies sometimes file for Chapter 11 in an attempt to gain a competitive advantage.
Which one of these statements related to Chapter 11 bankruptcy is accurate?
Capital intensity ratio
Which ratio identifies the amount of total assets a firm needs in order to generate $1 in sales?
it is unable to meet its financial obligations
A company is technically insolvent when:
low probability of financial distress
A company that has a(n) ________ would be most likely to have a high percentage of debt in its optimal capital structure.
total assets will increase by less than 5 percent.
A firm is currently operating at 78 percent of capacity. Next year's pro forma statement is based on an annual increase in sales of 5 percent. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, the:
long term debt
A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:
the static theory of capital structure
According to ________, a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs.
M&M Proposition II
According to ________, the cost of equity capital is directly and proportionally related to capital structure.
M&M Proposition I, no tax
According to ________, the value of a company is unrelated to its capital structure.
internal funds
According to the pecking-order theory, firms prefer to use ________ before any other form of financing.
greater the sensitivity of EPS to changes in EBIT.
Assume you are reviewing a graph that plots earnings per share (EPS) on the vertical axis, against earnings before interest and taxes (EBIT) on the horizontal axis. The steeper the slope of the plotted line the:
interest tax shield
By increasing its interest expense by $2,500 last year, Bishara Foods was able to reduce its taxes by $525. This $525 amount is called the:
$27,749 423,000*1.11=469,530 243,800+(84,600-67,680)*1.11=272,581.2 469,530-169,200-272,581=27,749
Last year's simplified financial statements for Adeyemi Cycles are shown below. Assume there are no income taxes. The firm is forecasting a sales increase of 11 percent. Assets and expenses are proportional to sales, but debt and equity are not. The firm does not plan to pay dividends. How much external financing will Adeyemi need to support its growth? Income Statement Balance Sheet Sales $ 84,600 Assets $ 423,000 Expenses 67,680 Debt 169,200 Equity 253,800
$5,676 3,360/56,000=6 1-0.8(retention ratio)=0.2 new sales=56,000*1.07=59,920 59,920*.06=3,595.2 dividend payout=3,595*0.2=719 2800+3595-719=5,676
Sweets by Lakshmi has sales of $56,000, net income of $3,360, retained earnings of $2,800, and a retention ratio of 80 percent. Assume the net profit margin and the payout ratio are constant and sales increase by 7 percent. What is the pro forma retained earnings?
the total cash flows of that company
The basic lesson of M&M theory is that the value of a company is dependent upon:
is positively related to the company's cost of equity.
The business risk of a company:
M&M Proposition I with no tax.
The concept of homemade leverage is most associated with:
the net cost of debt is generally less than the cost of equity.
The interest tax shield is a key reason why:
increasing the retention ratio.
The maximum rate of growth a corporation can achieve can be increased by:
will limit growth if unfunded
The need for external financing:
maximizes the value of that company's marketed claims
The optimal capital structure of a company:
will vary over time as taxes and market conditions change.
The optimal capital structure:
Tc * D
The present value of the interest tax shield is expressed as:
maximum; excluding any external equity financing, while maintaining a constant debt-equity ratio
The sustainable growth rate of a firm is best described as the ______ growth rate achievable ______.
weighted average cost of capital is maximized
The value of a firm is maximized when the:
$12,209 net working capital=(cash+AR+inv)-AP =(1,320+3,780+10,200-3,650)*(1.048) = $12,209
Tip Top Hats has $1,320 of cash, inventory of $10,200, net fixed assets of $33,600, accounts payable of $3,650, accounts receivable of $3,780, and long-term debt of $18,100. All costs, net working capital, and fixed assets vary directly with sales. Sales are projected to increase by 4.8 percent annually. What is the pro forma net working capital for next year?
I, II, III, and IV
Which of the following questions should be considered when developing a corporation's financial plan? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?
dividend payment to shareholders
Which one of the following is a marketed claim against the cash flows of a company?
The addition to retained earnings is equal to net income less cash dividends.
Which one of the following is correct in relation to pro forma statements?
total debt > $0
Which one of the following must be true if the sustainable growth rate will be greater than the internal growth rate?
